Alibaba shares fell by -2.3% during the day's afternoon session, and are now trading at a price of $85.12. Is it time to buy the dip? To better answer that question, it's essential to check if the market is valuing the company's shares fairly in terms of its earnings and equity levels.
The Market Is Undervaluing Alibaba:
Alibaba Group Holding Limited, through its subsidiaries, provides technology infrastructure and marketing reach to help merchants, brands, retailers, and other businesses to engage with their users and customers in the People's Republic of China and internationally. The company belongs to the Consumer Discretionary sector, which has an average price to earnings (P/E) ratio of 22.33 and an average price to book (P/B) ratio of 3.12. In contrast, Alibaba has a trailing 12 month P/E ratio of 22.6 and a P/B ratio of 0.22.
Alibaba's PEG ratio is 67.83, which shows that the stock is probably overvalued in terms of its estimated growth. For reference, a PEG ratio near or below 1 is a potential signal that a company is undervalued.
The Company Has a Positive Net Current Asset Value but Declining Profitability:
| 2020-03-31 | 2021-03-31 | 2022-03-31 | 2023-03-31 | |
|---|---|---|---|---|
| Revenue (MM) | $509,711 | $717,289 | $853,062 | $868,687 |
| Gross Margins | 44.6% | 41.3% | 36.8% | 36.7% |
| Operating Margins | 18.0% | 12.5% | 11.1% | 11.9% |
| Net Margins | 29.32% | 20.99% | 7.3% | 8.38% |
| Net Income (MM) | $149,433 | $150,578 | $62,249 | $72,783 |
| Net Interest Expense (MM) | 67,776 | 68,318 | -20,611 | -16,989 |
| Net Interest Expense (MM) | $67,776 | $68,318 | -$20,611 | -$16,989 |
| Depreciation & Amort. (MM) | -$13,388 | -$12,427 | -$11,647 | -$13,504 |
| Earnings Per Share | $55.92 | $54.72 | $22.72 | $3.76 |
| EPS Growth | n/a | -2.15% | -58.48% | -83.45% |
| Diluted Shares (MM) | 2,668 | 2,748 | 2,723 | 2,563 |
| Free Cash Flow (MM) | $180,607 | $231,786 | $142,759 | $199,752 |
| Capital Expenditures (MM) | -$45,386 | -$43,185 | -$53,324 | n/a |
| Net Current Assets (MM) | $29,589 | $36,776 | $25,175 | $67,843 |
| Current Ratio | 1.91 | 1.7 | 1.66 | 1.81 |
| Long Term Debt (MM) | $120,276 | $135,716 | $132,503 | $149,088 |
| Net Debt / EBITDA | -0.82 | -0.66 | -0.4 | -0.27 |
Alibaba benefits from growing revenues and a flat capital expenditure trend, strong margins with a negative growth trend, and a steady stream of strong cash flows. The company's financial statements show low leverage and wider gross margins than its peer group. However, the firm has declining EPS growth. Finally, we note that Alibaba has a decent current ratio.
